Amazon E-Business Model Essay (Article)

Introduction

This article explores the most successful Internet business model with specific reference to Amazon e-business model. The concept of ‘business model’ entails all fundamental components of a given business (Hedman and Kalling, 2003). The term has gained popularity mainly in e-businesses and among scholars in e-business studies (Afuah and Tucci, 2001; Cheng, Heng, Love and Irani, 2001).

Zott, Amit, and Massa (2010) have identified common grounds with regard to the concept of a business model. They note that business models have “new units of analysis, a holistic perspective on how firms do business, an emphasis on activities, and an acknowledgement of the importance of value creation” (Zott et al., 2010).

A number of giant corporations have evolved because of the growth in Internet technologies and associated business models. Some of the touted successful Internet business models include Yahoo!, Cisco, Amazon.com, Oracle, E-Bay, DoubleClick.com, Facebook, and HomeStore.com among others.

This decade has been the era of Internet-based business models. Yet, the Internet growth is not over. Scholars and professionals believe that the Internet has entrenched itself in the modern business. It has provided several ways through which businesses have risen above obstacles associated with distance and time (Tassabehji, 2003). The Internet is here to thrive and drive businesses.

Criteria of Success for Internet-based business models

One can rate a successful business model by using several criteria. A successful e-business model should display several elements of these criteria. Clear signs of a robust business model include:

• Growth in revenues
• Growth in profits
• Global presence and expansion into new markets
• Successful acquisitions and alliances
• Differentiation abilities

In addition to these characteristics of successful business models, successful e-business models have identified also other critical areas. These include:

• Creating unique Web site with user-friendly attributes
• Controlling unique product line
• Continuous innovation on products and services
• Use of reliable and easy Internet-based payment models or credit card methods
• On time delivery
• Use of effective marketing strategies
• Adopting best practices in the industry
• E-businesses must also keep their promises

E-business must meet specific needs of customers because competition has become fierce as new models emerge on a daily basis. Thus, customers may find it easy to conduct business with e-business firms, which are efficient and convenient. E-businesses have thrived on new technologies as ways of delivering services and products to their customers and audience.

E-commerce models aim to automate their business processes and maintain and promote personal interaction with customers simultaneously. Successful e-businesses have exploited conventional principles in technology implementation and maintenance. Internet-based business models have thrived in various areas (Applegate, 2001), which include:

• Customer services
• Direct marketing and banners
• Information and content sales
• Product sales
• Subscription services

Generally, successful e-businesses have used many related but different models of e-commerce together. These businesses have gone beyond simple categorisation and have diversified their products and services in order to create several streams for revenues and run hybrid models in cost-effective manner.

Weill and Vitale identified eight areas of e-business models, which included “direct customer, full-service provider, intermediary, whole of enterprise, shared infrastructure, virtual community, value net integrator, and content provider” (Weill and Vitale, 2001).

These authors based their classification of e-business models on a thorough review of several studies. They identify how each model operates, its strategies for revenue generation, including core competencies and critical factors for success.

Amazon.com E-business Model

Most people think and relate e-commerce to Amazon. One may wonder how a small firm that started as an online book retailer dominated the global e-commerce business (Marcus, 2004). A focus on Amazon’s business model and strategies reveal simple facts. First, the Internet does not restrict what Amazon can sale online anytime and anywhere.

Second, Amazon has unique customer experience, and it controls customers’ accounts and wins customers loyalty. Third, Amazon has diversified into other digital goods beyond books. It is amazing to recognise how Amazon has grown in terms of services and products beyond books, movies, and music.

Moreover, it is in records that between 1995 and 2003, Amazon incurred losses of up to three billion USD. However, this has changed today because Amazon has over $34 billion in revenues and over one billion USD in profits annually.

Amazon focuses on three areas in its e-business model, which include “online retail, internet services, and the Kindle ecosystem” (Noren, 2013).

Figure 1: Amazon leads all other e-business models

From the definition of Weill and Vitale (2001), one can observe “roles and relations among a firm’s consumers, allies, and suppliers that identifies the major flows of product, information, and money, and the major benefits to participants” (Weill and Vitale, 2001). Still, Amit and Zott capture three critical aspects of e-business strategies, such as context, structure, and governance of transactions (Amit and Zott, 2001).

In this context, the content element involves exchange of goods and information, structure indicates the association between stakeholders while governance of transactions entails oversight on information, services, and resources. From Amazon e-business model, one can observe various aspects of e-commerce. For instance, Amazon has created value for customers through distinctively low costs.

Customers can choose varieties of services and products. In addition, the online retailer has diversified to products and revenue sources in order to keep high returns at low costs. Still, Amazon has the required skills for the business sustainability (Afuah and Tucci, 2001). Other traditional brick-and-mortar retailers may also apply these concepts.

According to Applegate, an online business model has three important elements, which consist of “concept, capabilities, and value” (Applegate, 2001).

Amazon’s e-business model has defined products and services available, global market opportunities, competitive abilities, effective strategy for dominating the e-retail sector, and strategic option for transforming the business as new products come into the market (Johnson, 2010).

Amazon has created its business capabilities and delivered them through its employees, affiliates, culture, internal structure, development strategies, infrastructure, sales and marketing, advertisement, and effective management strategies.

One can understand the success of Amazon by looking at its “profits margins, shareholders’ returns, return on investments, and the brand, its reputation among customers, the global market share, and financial performance” (Hedman and Kalling, 2003).

A clear distinction between ‘the Internet Age’ business model and the traditional business model lies in the way both parties conduct their businesses.

Figure 2: Amazon business model (Noren, 2013)

Technology allows limitless inventory

Amazon.com wants to be the most customer-oriented online retailer where consumers can find and discover any product or service they might be interested in online. Moreover, Amazon seeks to provide the lowest prices to its customers.

Amazon started as an online book retailer. Today, the e-retailer has diversified into other areas like movies, DVDs, apparel, toys, jewellery, used and refurbished items, home and garden equipment, electronic products, and sports equipment among others.

While Amazon established e-book as its main product and business strategy, today one can find several items and services on Amazon. This implies that Amazon will no longer lose revenues as it did in the past. Instead, the company has created several sources of constant revenues.

Amazon e-business model and Ebay.com strategies are the same. However, Amazon has learned to create unique edge among its competitors through innovation and technologies.

For instance, Amazon creates a long list of all available products and services, which become live for customers on the Amazon Website. These products and services will last on the Web site as long as it takes them to sell, or until the owners decide to remove them from the list.

Amazon managed to emerge from the dot-com era because of its feasible and innovative e-business strategy. The company focused on dynamics of the market, customer experience, value, and a radical profit approach that changed the book industry. Today, Amazon wants to upset the print media industry through Washing Post by using the same strategy.

The company rose beyond digitalised products to include other shippable products. In addition, Amazon established several warehouses and it did not stop there. It continues to revolutionise e-commerce through new technologies and innovative solutions.

Technology enhances customer experience

Amazon was the pioneer of unmatched customer service since the early days of the Internet business. As a result, Amazon has created a Web site that ensures that all customers have a positive experience throughout their navigation of the site. The Web site is user-friendly. For instance, the firm has eliminated customer anxiety through its online shipping system.

Amazon treats its customers as kings. The company has been able to develop a relationship with its customers, which leads to trust and long-lasting relationships. This takes place in product shipping.

Therefore, the kind of customer experience that Amazon creates usually exceeds sole reliance on technologies. The company has thrived on one-on-one strategies and personal touch when handling customers from all over the world through technologies (Ives and Mason, 1990).

Amazon has a large volume of products, which it sells throughout the year. It maintains several warehouses and other centres in strategic locations around the globe.

Amazon offers best selections to customers because of technology (Porter, 2001). In addition, consumers can save lots money by purchasing other used products available at Amazon, including books. Customers also make frequent visits to the Web site to check new free offers on shipping, discounts, promotion, cash back guarantees, rebates, and other instant off deals. Amazon has something special each day for its consumers.

For instance, Amazon has a Gold Box, which has a special promotion every hour. The company limits the duration for such deals so that customers can respond rapidly to them. Customers can track all their deals through the available shopping list on the site.

Amazon allows customers to make special wishes through the Wish List, own Auctions account, Member Page, and become associates. Still, customers can also terminate their relationships with company by closing the account if they wish to do so.

A successful e-business model must focus on delivering values to the customer before profits. The process requires effective identification of unexploited or underserved markets and then formulating a clear value proposition to address customers’ needs even if such needs are foreign to the business. Amazon has continued to revitalise its services to customers in order to move beyond what it has achieved.

This process involves constant interactions with customers in order to identify what they need and then developing solutions to them no matter how difficult such solutions could be. Overall, business leaders can utilise a clearly defined customer value proposition, which serves clear functions to formulate a suitable profit approach, required resources, and processes that a firm requires in order to thrive.

Technologies allows high margins and low prices

Many people are yet to understand how Amazon generates large revenues from low prices. This has been the major strength of the e-business model and strategy of Amazon (Shin, 2001). The company gets revenues by deducting a little percentage on the sales price for every product and service it sells. This is like a commission. Hence, associates only pay Amazon when they sell their products or services through the Web site.

Amazon seeks to establish price control over its contents. However, this has been a major challenge as it strives to pursue e-retailer strategy. Retailers offer distribution channels at no charge, but they get revenues from the sales of items. Amazon has perfected this through shipping products and other online products available through Kindles.

Customers have often considered Amazon because of best prices and excellent customer services.

Innovation

Amazon Web site Services and Kindle are two big clean sheet models that have worked exceptionally well for the company. Amazon believes in incremental and low risk innovative models. The company takes time to initiate a new project and product categories. Amazon explores new geographies into details. However, this does not guarantee that all its ideas will work.

Instead, the company relies on its expertise and knowledge to execute innovative strategies. Amazon knows “how to open new fulfilment centres, whether to open one, where to locate it and how big to make it” (Cook, 2011). Amazon can analyse all its business models quantitatively in order to draw intuitive judgements (Cook, 2011).

The company took innovation further when it introduced a new value proposition based on a commission system. Customers and brokerage services would receive commissions on used books sold on the Amazon Web site. Further, Amazon introduced a new business model in which it would only serve its third-party sellers.

This allowed Amazon to introduce other retailers, who were initially rivals into its circle of affiliates. Under this model, Amazon changed its e-business model from “direct sales to a sales-and-service model, aggregating many sellers under one virtual roof and receiving commissions from the other companies’ sales” (Johnson, 2010).

Innovation at Amazon did not stop there, but rather the company went ahead and identified a new business opportunity from the IT community. Amazon realised that serving the IT community would require diverse approaches, resources, and a new profit strategy. This was a new e-business model based on innovation. In the year 2002, the company introduced its new Web services platform.

This was the time when Amazon had reached profitability. Many critics considered it risky to invest in a new business model at the time (Johnson, 2010). However, within five years, Amazon Web services had grown considerably. Innovation at Amazon became obvious when the company introduced Kindle e-book reader. This product was completely new to Amazon and disrupted the entire print media industry (Wheeler, 2011).

Kindle product transformed “Amazon to an original equipment manufacturer” (Johnson, 2010). Amazon “wrapped this technology in a seamlessly integrated iTunes-type digital media platform that combined both transaction and subscription-based content delivery” (Johnson, 2010).

The company managed to collaborate with content developers in an innovative approach in order to develop an open back-end system, which could allow its associates to create new materials for the Kindle. The Kindle business model proved successful when Amazon managed to sale over 500,000 Kindle contents in the first year.

This innovative model has allowed Amazon to develop and expand the e-book market. In addition, Amazon has positioned itself as the next big company in the newspaper and periodical distribution by acquiring a stake at Washington Post.

What Amazon sells on Kindle and Apple sells on iTunes shows a difference in prices. Amazon has slightly cheaper contents relative to iTunes products. This is also the case for physical products between these two companies. Gans notes that this is Jeff Bezos’ approach of competing with Apple (Gans, 2012). Amazon has discounts on all its digital contents, but the company makes revenues from the large volumes it sells.

However, this is a business model and not a price war between Amazon and Apple (Gans, 2012). In a price war, only one company may win and dominate the market. According to Gans, when business models compete, it implies that the two can coexist in the same market.

However, every model will win customers based on its strengths. For instance, Apple would get customers who want performance and reliability. These could be high-end consumers and perhaps institutional or commercial establishments. On the other hand, Amazon would appeal to low-end consumers who want cheap products fast. Overall, what each business model does affect the other model.

From the Amazon model, one must recognise that any business model can only grow in a culture where leadership fosters a culture of inquiry, new value propositions, new approaches to profit generation, and in situations where leadership encourages developments of new business models with interests (Austin, Nolan and O’Donnell, 2009).

Johnson notes that “in built-to-transforms companies, managers recognise that becoming is a part of being, and that the road to the next big thing can be travelled only by those with open minds” (Johnson, 2010).

Amazon e-business model shows that management discipline and leadership abilities that can steer a firm through constant processes of transformation and growth, which are mandatory for success (Kagermann, Osterle and Jordan, 2010).

Jeff noted that survival in dynamic and technological oriented business environments required a business model that could easily allow the company to transform its processes (Johnson, 2010; Osterwalder and Pigneur, 2010). Hence, he based the model on constant transformation.

Whenever Amazon finds a new chance to serve a new market or its existing markets, “it develops a new business model to use in such circumstances” (Johnson, 2010). Johnson notes that Amazon has “the unique ability to launch and run entirely new types of businesses while simultaneously extracting value from existing businesses” (Johnson, 2010).

Hence, the company’s growth will significantly depend on a series of changes, as it focuses on its vision. Johnson refers to Amazon’s success as the company’s “willingness to pursue growth in its “white spaces”—the range of potential activities not defined or addressed by the company’s current business model” (Johnson, 2010).

Porter presented the most important text on business strategies, but professionals have not exploited Porters’ texts (Porter, 1991). Porter asserts that the “low-cost and differentiation advantages that firms enjoy on the product market ultimately stem from initial conditions and managerial choices” (Porter, 1991).

Porter notes that management decisions have significant impacts in drivers of business, which are mainly resources that employers must work on in order to create low costs and establish differentiation among competitors. As a result, Amazon has been able to develop specific strategic positions in the e-business industry, which has allowed it to succeed and continue to forge new relations.

While this may not be a business model, it entails several aspects that are common in all business models. It is important to note that Porter does not specifically identify the possible models of the business. However, one can draw a conclusion from his focus on managerial decisions and organisational success.

An effective e-business model entails a strategy (McKeen and Smith, 2011). For instance, managerial decisions depend on the longitudinal aspects and are responses from criticisms that organisations get from critics.

However, the fundamental concepts of these business models entail resource-based views (RBV) (Barney, 1991). Amazon has effectively used its resources to create competitive advantages in the e-retailer business (Wünsche, 2012; Bharadwaj, 2000; Kalling, 1999).

A further review also highlights forces, which have driven Amazon to success. For instance, external environments of e-business became competitive as other players like EBay and Apple introduced their models. Hence, Amazon had to review its needs and values with regard to what it could offer the market under such circumstances (Weill and Ross, 2009; Ginsberg, 1994).

Amazon also had to take account of its internal structures, resources, expertise, knowledge, system capabilities, and the organisational values. These are systemic processes, which must also relate with external environments, the firm’s position, and its internal factors.

Current research on e-businesses has not focused much on the concept of resource-based view. Instead, studies have concentrated on different changes in business processes, which they refer to as business models. McGrath & MacMillan show “the way an organisation organises its inputs, converts these into valuable outputs, and gets customers to pay for them in the business model concept” (Mcgrath and Macmillan, 2000).

In this sense, one can observe how Amazon has reinvented entrepreneurial innovation by combining old aspects of retailing together with modern technologies to create new business models, markets, products, supply, product developments, and modes of deliveries.

According to Eisenhardt and Sull, one can easily observe such business advantages in a firm’s position “on the product market, in its resource base or in the key processes – all of which could be referred to as components of a business model” (Eisenhardt and Sull, 2001). This is true in the case of Amazon because the company has utilised these components of its business model to be the best e-retailer today.

Technologies have created rapid changes in the retail sector. As a result, the focus has turned from being ambiguous in the market to specific processes, which follow simple rules of business strategies. Such a focus on a business model and strategy has yielded robustness for the Amazon’s rapid growth. In this regard, growth has been the ultimate focus of Amazon rather than huge profits from sales.

Conclusion

The simple and innovative approaches that Jeff Bezos uses at Amazon have created unique business model that has allowed the company to move to the next level of e-commerce beyond its peers. The company controls all payments whereas sellers just display their products and services.

From Amazon’s e-business model, one can learn that a global marketplace gives the company a guaranteed access to millions of products, which it does not have to incur any investment in order to display.

Overall, effective use of technologies, innovation, and excellent customer service, limitless inventory, low costs and high margins and leadership have propelled Amazon to be the most successful e-retailer today.

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